Allowable Rollovers to a Roth IRA
Roth IRA rollovers refer to a process of moving money from a traditional IRA or another Roth IRA to a Roth IRA. The rollover process is only allowed under certain, limited circumstances. If you make a rollover to a Roth and you do not follow the IRS rules and regulations concerning rollovers, the IRS will disallow the rollover creating tax consequences for you.
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Process
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The process for a Roth IRA rollover involves closing down your existing IRA and opening a new IRA. You must contact your new IRA custodian (the financial institution that will hold your new IRA funds) and notify them that you wish to set up a new Roth IRA account. You must fill out an application for a Roth IRA. Then, you must fill out a transfer request form to move money from your existing IRA to a Roth IRA. When you turn in your transfer request form, you will receive the balance of your existing IRA. The custodian for your IRA will send you a check for the funds in your account. Roughly 20 percent of your total balance will be withheld for tax purposes. The IRA money must then be deposited into a new Roth IRA within 60 days.
Limitations
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The significance of rolling over to a new Roth is that you receive the tax benefits of the Roth IRA. However, the money you roll over may only be rolled over on a tax-free basis once during a 12-month period. Additionally, you may only make one rollover from any given IRA account within a 12-month period. This means that once a rollover is completed from a particular IRA account, you may not make another rollover form that account for another 12 months.
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Benefit
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The benefit of performing an IRA rollover is that you are in complete control of the transfer process. You may use the money any way you like for 60 days. Additionally, any money inside of an IRA account is eligible for a rollover. This is true even if you have multiple IRA accounts.
Disadvantage
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The disadvantage to a rollover is that you must keep track of all of the money you receive. You take all of the responsibility for the rollover. Also, the fact that you are limited to one tax-free rollover per 12 months from your IRA means that if you discover that the new Roth IRA account is not beneficial for you, you will be unable to do another tax-free rollover from that account.
Warning
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If you fail to deposit the money into your new Roth IRA account within 60 days, the rollover will be treated as a distribution. If you are under age 59 1/2, then you will pay a penalty of 10 percent on the amount of money that was supposed to be deposited into the account, but was not. This is in addition to paying ordinary income tax. If the rollover came from another Roth IRA, you will also pay income tax on the investment earnings in the Roth as part of the penalty for an early distribution.
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References
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Comments
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Where is the post I made earlier? re Partial Rollover of 401ks.
